Vacancy can rise while demand grows and fall while it shrinks. Net absorption separates the two, and split by grade it shows where an ageing office really stands.
Net absorption is the change in occupied floorspace over a period: occupied stock at the end (stock less vacant space) minus occupied stock at the start. Equivalently, completions minus space withdrawn minus the change in vacant space. In an illustrative 4,000,000 m² office market where vacancy rose from 480,000 to 500,000 m², net absorption was positive, +10,000 m², because 120,000 m² was completed and 90,000 m² withdrawn. By grade it was +130,000 m² for prime and −120,000 m² for secondary.
Worked in full in Office Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Net absorption is the demand measure behind every office market report, and it is the one most often misread. A rise in vacancy can come with positive absorption, if more space was built than was taken. A fall in vacancy can come with negative absorption, if obsolete buildings were demolished or converted faster than tenants left. For an owner of an ageing building the total is nearly useless: what matters is absorption by grade, because demand is moving from one to the other.
| Line | Prime | Secondary | Total |
|---|---|---|---|
| Stock at start | 1,000,000 | 3,000,000 | 4,000,000 |
| Vacant at start | 60,000 | 420,000 | 480,000 |
| Completions | 120,000 | 0 | 120,000 |
| Withdrawn (demolished or converted, all vacant) | 0 | 90,000 | 90,000 |
| Stock at end | 1,120,000 | 2,910,000 | 4,030,000 |
| Vacant at end | 50,000 | 450,000 | 500,000 |
| Vacancy rate, start to end | 6.0% to 4.5% | 14.0% to 15.5% | 12.0% to 12.4% |
Occupied stock = stock − vacant space
Start: 4,000,000 − 480,000 = 3,520,000. End: 4,030,000 − 500,000 = 3,530,000
Net absorption = 3,530,000 − 3,520,000 = +10,000 m²
Check: completions − withdrawals − change in vacancy = 120,000 − 90,000 − 20,000 = 10,000
Excel: =(StockEnd-VacEnd)-(StockStart-VacStart)
The shortcut "vacancy at start minus vacancy at end" gives 480,000 − 500,000 = −20,000 m², the wrong sign. It works only when the stock does not change, which in a market with a development pipeline and a conversion programme is never.
| Grade | Occupied, start | Occupied, end | Net absorption |
|---|---|---|---|
| Prime | 940,000 | 1,070,000 | +130,000 |
| Secondary | 2,580,000 | 2,460,000 | −120,000 |
| Total | 3,520,000 | 3,530,000 | +10,000 |
The market as a whole barely grew, but 130,000 m² of occupation moved into prime and 120,000 m² left secondary. Prime absorbed all its new completions and cut its vacancy from 6.0 to 4.5 per cent. At the year's pace, its 50,000 m² of vacant space would let in 4.6 months, which is the arithmetic behind rising prime rents in a market whose headline vacancy went up.
Secondary vacancy rose to 15.5 per cent even after 90,000 m² of empty buildings were taken out of the stock. Without those withdrawals, secondary vacant space would be 540,000 m², 18.0 per cent of the original stock. With negative absorption there is no months-of-supply figure: at the current trend the space is never let as offices, which is what obsolescence looks like in market data.
Agents also report take-up, the floorspace let during the year, here 300,000 m². It counts every letting, including tenants moving from one building to another in the same market. Net absorption nets off the space those tenants released, here 290,000 m². A year of record take-up can be a year of flat demand in which occupiers relocated to better buildings, and leaving behind empty floors is part of the same transaction.
| Completions | Withdrawn | Stock at end | Vacant at end | Vacancy |
|---|---|---|---|---|
| 0 | 90,000 | 3,910,000 | 380,000 | 9.7% |
| 120,000 | 90,000 | 4,030,000 | 500,000 | 12.4% |
| 200,000 | 90,000 | 4,110,000 | 580,000 | 14.1% |
| 120,000 | 0 | 4,120,000 | 590,000 | 14.3% |
| 120,000 | 200,000 | 3,920,000 | 390,000 | 9.9% |
The same demand produces a vacancy rate anywhere from 9.7 to 14.3 per cent depending on what was built and what was removed. Vacancy is a supply number as much as a demand number. Read it with absorption next to it, and read both by grade.
Treating a falling vacancy rate as evidence that a secondary building will re-let. In this market, a conversion programme that took 200,000 m² out of the stock instead of 90,000 would bring headline vacancy down to 9.9 per cent with exactly the same demand, and secondary absorption would still be negative. The owner of a 1990s floor plate should underwrite the re-letting on secondary absorption, not on the headline rate, and price the void accordingly: how long that void can run before the value disappears is worked in how to value a vacant office building, and how fast the building's value erodes in how fast an office building depreciates.
The book follows a multi-let office through exactly this split, a building whose value depends on whether it is on the right side of the move; the re-letting model is in the free workbook for this case.
Yes, whenever more space is completed than is taken. In the illustrative market, 120,000 m² of completions and 90,000 m² of withdrawals left vacancy up 20,000 m², from 12.0 to 12.4 per cent, while occupied space grew by 10,000 m². The shortcut of start vacancy minus end vacancy gives -20,000 m², the wrong sign.
Take-up counts all space let in the period, including tenants relocating within the market. Net absorption deducts the space they leave behind. In the worked case take-up was 300,000 m² and space released 290,000 m², so net absorption was only 10,000 m². High take-up with low absorption usually means relocation to better buildings.
Divide vacant space by monthly net absorption. Prime space in the worked market had 50,000 m² vacant and absorbed 130,000 m² in the year, so 4.6 months of supply. Secondary absorption was negative, -120,000 m², so the measure has no meaning there: at the current trend that space does not let as offices.
This article is one calculation from Office Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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